Allahabad High Court
Bhagmal Saudagar Mal vs Commissioner Of Income Tax on 16 December, 2003
Equivalent citations: (2004)188CTR(ALL)431, [2004]267ITR637(ALL)
Author: M. Katju
Bench: M. Katju, Umeshwar Pandey
JUDGMENT M. Katju, J.
1. Heard learned counsel for the parties.
2. The facts of the case are that the assessee is an unregistered firm and the relevant assessment year is 1978-79. Saudagar Mal and Ram Lal are two partners of the firm. Both these partners filed their individual returns declaring their income from the firm and these returns were accepted by the ITO, B Ward, Dehradun, under Section 143(1) of the IT Act, on 7th Nov., 1978, and 10th Nov., 1978, respectively.
Subsequently the firm was called upon to file its return of income for asst. yr. 1978-79 by the ITO, C-Ward, Dehradun, and the return was duly filed by the assessee-firm and an assessment was made by the ITO, C-Ward, Dehradun, on 19th March, 1981.
The assessee challenged the validity of the assessment before the AAC and contended that the assessment on the partners of the firm having already been made there was no justification in law for making the assessment on the firm in respect of the same income which has been assessed in the hands of the partners. However, the AAC rejected the claim and his order was upheld by the Tribunal which dismissed the claim following the decision of the Punjab and Haryana High Court in the case of Rodamal Lalchand v. CIT (1977) 109 ITR 7 (P&H).
3. Thus, the question which arises in this case is whether the assessment of the assessee-firm was valid when two of its partners had already been assessed individually in respect of their shares in the income of the firm.
4. It may be mentioned that an unregistered firm has the same status in income-tax law as an AOP. In other words, when a firm is not registered under the IT Act, then there will be a single assessment on the firm and no assessment on the individual partners. In contrast, when a firm is registered under Section 185 of the IT Act, the benefit of the registration is that the income of the firm is divided among the partners and the partners are assessed individually in respect of their share in the income of the firm. Thus, in this way the partners have to pay less tax when the firm is registered under Section 185 because the slab on their individual income goes down and thus the total income-tax payable also goes down. However, when the firm is unregistered higher tax has to be paid because the income of the firm is not divided among the partners and hence the income-tax slab is at a higher rate.
5. In our opinion, there is no bar to assess an unregistered firm even after the individual partner is assessed. This is for two reasons :
(1) As stated above, when a firm is unregistered the individual partners are not assessed on their share on the income of the firm vide Section 86(iii) but only the firm is assessed as a single entity. Hence, it was a mistake to have assessed the individual partners on their share of the firm's income.
(2) Secondly, even otherwise it is open to the ITO to make a protective assessment which is well-known in income-tax law vide CTT v. Khalid Mehdi (1987) 165 ITR 685 (AP), Smt. Hemlata Agarwal v. CIT (1967) 64 ITR 428 (All),.
6. In Jagannath Hanumanbux v. ITO (1957) 31 TTR 603 (Cal), the Calcutta High Court held that it is open to the Department to make assessment on two persons in respect of the same income where it is doubtful which assessee is really liable to charge, because unless such protective assessment is made, assessment proceedings against the party ultimately found to be liable may become time-barred vide Lalji Haridas v. ITO (1961) 43 ITR 387 (SC), Sidh Gopal Gajanand v. ITO (1969) 73 ITR 226 (All), Sunil Kumar v. CTT (1983) 139 ITR 880 (Bom), Sohan Singh v. CTT (1986) 158 ITR 174, 179 (Del), CIT v. Cochin Co. Ltd. (1976) 104 ITR 655 (Ker), etc.
7. In ITO v. Ch. Atchaiah (1996) 218 ITR 239 (SC), the Supreme Court observed:
"Under the present Act, the ITO has no option like the one he had under the Act of 1922. He can, and he must, tax the right person and the right person alone. By 'right person' it is meant the person who is liable to be taxed, according to law, with respect to a particular income. The expression 'wrong person' is obviously used as the opposite of the expression 'right person'. Merely because a wrong person is taxed with respect to a particular income, the AO is not precluded from taxing the right person with respect to that income."
Their Lordships distinguished the decisions relied upon by the assessees before the Tribunal and the authorities i.e., CIT v. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC) and CTT v. Muralidhar Jhawai and Purna Ginning and Pressing Factory (1966) 60 ITR 95 (SC), on the reasoning that these cases were rendered under the Act of 1922. On the other hand, their Lordships approved the law laid down by the Hon'ble Punjab and Haryana High Court in the case of Rodamal Lalchand v. CIT (supra), which was relied upon by the Department.
8. On the facts and circumstances mentioned above, the question of law referred to this Court is answered in the affirmative i.e., in favour of the Department and against the assessee.